Who wins in this £140bn deal?

Nationwide, the country's largest building society, and Portman, the third biggest, have announced plans to merge next year. The result will be a £140bn mutual - almost five times the size of nearest rival Britannia.

Jeff Prestridge and Toby Walne assess what the deal means for customers of both societies and visit the market town of Marlborough, Wiltshire, to gauge opinion from customers of the Nationwide and Portman branches situated only a few yards apart on the main street. They also look at the implications of this mega-merger for the rest of the industry.

What exactly has been agreed between Nationwide and Portman?

Onthe surface, Nationwide, by far the country's largest building society, has agreed to merge with its smaller rival Portman. In truth, Nationwide, with assets of some £121 billion, is swallowing up Portman, which has assets of £18.7 billion. Once the deal is finally signed and sealed in September next year, the Portman brand will disappear from the High Street. The new merged group will be called Nationwide.

The result of this mashing together of two building societies will be a £140 billion mutual, bigger than the rest of the building society industry put together.

Will the merger result in windfalls for both sets of customers?

Far from it. The only windfall winners will be the 1.2 million to 1.4 million Portman members who stand to receive average payments of about £400 from the distribution of 70% of Portman's reserves. None of Nationwide's 11 million members will receive a penny.

Details are sketchy and will become clear only early next year when Portman sends out more details ahead of its 2007 annual general meeting in April, but some savers with high balances stand to receive four-figure cash sums. All qualifying members will get a minimum £200 if they are either a saver or a borrower, and £400 if both.

To qualify for windfalls, Portman customers must have had a minimum account balance of £100 on September 11, so there is nothing to be gained from opening savings accounts or mortgages now.

Windfalls will be paid in October next year and will be taxed as income.

How has this one-sided windfall distribution gone down with customers?

The fact that only Portman customers will receive any cash from the merger has certainly annoyed some Nationwide customers, judging by the reaction from those using its Marlborough branch last week. Juliet Lockie, 39, a catering business manager and a longstanding Nationwide customer, says: 'If Nationwide customers are not to receive a windfall, then it shouldn't be called a merger, but a takeover.

'It seems unfair that I don't get a windfall, while Portman customers do. It's just a pay-off for Portman losing its name.'

Most Portman customers at the society's Marlborough's branch, however, are delighted. Retired Army officer Patrick Mason, a 64-year-old self-confessed carpetbagger, says: 'I will probably pick up only £200 from the deal, but I am still happy. If customers are given the chance of a windfall, most understandably say yes and grab it.'

Patrick, who is also a Nationwide saver, now hopes that once the Portman deal is done, Nationwide will demutualise, triggering another windfall. But Nationwide boss Philip Williamson insists that Patrick will not have his way. 'This is not a route towards eventual flotation,' he says. 'It provides us with a great opportunity to provide our customers with added value.'

What is the benefit of this deal for Nationwide customers?

This is difficult to quantify, especially in the short term. Once the merger is complete, the combined society will provide Nationwide customers with 60 new branches from which to do business.

Some Nationwide customers may also choose to use Portman's wealth management and tax planning divisions - services not currently offered by Nationwide.

Portman is also a big player in the 'sub prime' mortgage market - that is, loans tailored towards those with chequered credit records - again a market in which Nationwide is not involved.

Longer term, Williamson believes a bigger organisation will be able to deliver economies of scale that will result in improved profits. This will then be reflected in customers receiving better savings and mortgage deals and paying fewer fees and charges.

But this will happen only if Nationwide is run more efficiently - along the lines of Portman.

Analysis of key financial figures for both societies suggests that Nationwide has more to learn from Portman about prudent management than vice-versa. A review of the latest report and accounts indicates that Portman generates more profits and fewer management expenses per pound of assets managed than Nationwide.

Williamson has admitted that Nationwide suffers from a poor back office, with mortgage and administration centres scattered across the country. Only if these are made more efficient will better deals be delivered.

Apart from the windfalls, what advantages are there for Portman customers?

Quite a lot. For a start, Nationwide is big on current accounts, credit cards, personal loans and internet banking - product areas not offered by Portman. Customers of Portman will also have access to Nationwide's far larger branch network as well as its 2,200-strong cash machines.

Nationwide has also said it intends to realign Portman's mortgage rate with its own by this time next year. Currently, Nationwide's standard variable rate mortgage is 6.24%, 0.51 percentage points cheaper than Portman's.

Once the merger has gone through, members of Portman will become Nationwide members. This means that if Nationwide does ever float on the stock market or is bought by a rival bank, they will be eligible for further windfalls.

Will all the branches be kept?

No. Portman has 149 branches, while Nationwide has 680. In 90 locations, including Marlborough, Portman and Nationwide branches within a mile of one another. One of these in each of the 90 locations will close with the 'better' site remaining.

Nationwide customer Edward Ferguson, 67, a retired town clerk from Alton Priors near Marlborough, says the closure of either the Portman or Nationwide branch in Marlborough will be regrettable.

'I remember when the Portman branch shut in Pewsey, a few miles away,' says Edward, who also has a savings account with Portman. 'It had a devastating effect on the local community. Shutting a branch will hurt jobs and have a bad impact on Marlborough.'

What happens next?

It's a matter of wait and see. Portman members will receive more details in the New Year, including information on the size of windfalls. Both Portman and Nationwide have set up helplines. They are 0845 840 6000 and 0845 205 0150 respectively.

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Savings lobby group The Investors' Association believes the proposed merger should now be followed by a wave of similar deals between other leading building societies.

Tim Askew, spokesman for the association, says mergers would result in fewer but more efficiently run mutuals, which would then be able to give the banks a run for their money and, crucially, deliver better products for customers.

He says: 'Let's hope the Nationwide/Portman deal will stimulate more cautious society boards into future merger action to promote the long-term interests of their own members and the wider public.

'My wish is that the mutual sector in the UK emerges fitter, leaner and more able to compete strongly.'

Adrian Coles, director general of the Building Societies Association, says that while further industry rationalisation is inevitable, he does not believe it marks the beginning of the end for the sector.

'There's a real place for local societies that understand their marketplace,' he says.

Askew believes that the building society sector is now 'crying out' for a merger between two of the three other top five societies --Britannia, Coventry and Yorkshire. Britannia and Yorkshire, he says, already have a branchsharing arrangement, so the logical next step would be to merge, ending the need for two highly paid boards of directors, two head offices and two sets of auditors.

But bosses of both Britannia and Yorkshire are downplaying such a move. Britannia chief executive Neville Richardson says mergers will always be considered if they are in the best interests of members.

Yet, Britannia, he says, is still busy integrating the Bristol & West branches it bought last year. Yorkshire says it is intent on remaining an 'independent mutual'.